Owning property – whether it is an apartment building, vacant land or a parking garage – is a strategy that has been used to build wealth for generations. Real estate investment can offer an opportunity for individuals to generate income, long-term capital gains and asset appreciation, while still preserving their investment principal in a tangible, brick and mortar asset.
Other top reasons why people often invest in real estate are to add diversification and stability to existing investment portfolios. Real estate values are not subject to the same pricing volatility as other asset types, such as U.S. stocks or commodities. In addition, real estate can provide a hedge against inflation as properties come with an opportunity to raise rents to reflect changing market conditions. For many individual investors, even high net worth individuals, buying an entire property, such as an office or apartment building requires a substantial financial commitment. It also comes with the added work of managing and maintaining the property. Investing in a private equity real estate limited partnership or fund offers an easier entry point with an experienced management company who assumes responsibility for strategic planning, acquisitions and day-to-day management responsibilities.
Benefits of investing in high quality private equity real estate projects include:
- Attractive long-term capital gains through efficient management of property and asset appreciation;
- Greater stability and less overall volatility in investment portfolio performance;
- Increased asset diversification; and a
- Hedge against inflation
What to know before you commit to private equity real estate investment:
Private equity real estate investments give accredited investors access to high-quality real estate investment opportunities. However, it is important to make sure the investment is the right fit to meet your financial goals and needs. Some key points to consider include:
- Minimum investment amount: The common minimum investment amount for private equity real estate offering ranges between $80,000-$150,000 per unit. Investors also may purchase multiple units in one offering.
- Liquidity: Real estate is typically considered to be a long-term asset. By its nature, real estate is an illiquid asset that cannot be bought and sold like stocks or bonds. Currently, CanAm offerings are structured with 3-5-year terms, and future offerings could have longer 5-7-year terms. To maximize returns it is best to keep capital invested for the duration as an early exit can impact values. So, it is important for an individual to be comfortable with the proposed term of the investment as stated in the prospectus.
- Risk tolerance: Like most investments, real estate does carry inherent risks. It is important that investors consider that investment in context with their tolerance for risk, and also look at the investment on a risk-adjust return basis. In other words, is the return adequate given the risk involved?
Who is eligible for private equity real estate investment?
U.S. private equity investments are subject to certain federal rules and regulations. Although it depends on how an investment offering is structured, most private equity real estate investments are required to limit the offering to accredited investors. Accredited investors must meet certain minimum thresholds regarding net worth and/or income. An individual is considered to be an accredited investor if he or she:
- Has a net worth that exceeds US $1 million. The net worth can include joint assets shared with a spouse, but excludes the value of a primary home or residence; or
- Generates an annual income in excess of US $200,000 for an individual, or joint income with spouse in excess of US $300,000. The individual needs to meet that income threshold for the prior two years, and also have a reasonable belief that he or she will achieve that minimum income level in the current year.
Private equity real estate remains an attractive target for investment capital. According to Preqin, global private equity real estate funds raised $124 billion in 2018 from institutions and individual investors, which marks the sixth consecutive year that funds raised in excess of $100 billion. As with any investment opportunity, it is important for investors to weigh the risk-adjusted returns. It also is wise for investors to work with a trusted advisor to consider private equity real estate investment funds in the context of their broader investment portfolio strategy and financial planning goals.